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Retirement plan geared to sequence of return risk, what to do when portfolio is rising

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We are possibly 2 years off retirement (when I say we I mean OH) however OH may continue beyond that in semi retirement depending on work offered (self employed with 5/6 sources which are unrelated to each other).

I will have SP in 1 year. We have 3 small DBs in payment £14.5k. There is a cash/nr cash fund to cover OH’s SP equivalent until SPA in 7 years. Necessary spend £18k

We have a written down plan to take 1% per quarter of total equity investments. This could lead to highly variable income depending on the sequence of events. The variability is not a psychological problem as we have been self employed for 30+ years and this income will be used for travel and any excess gifted. I have a rainy day fund which I thought to use if the market tanked to supplement the lower drawdown. Example pot £1.1m at start - income £44k p.a. - crash, £600k pot income £24k + £10k from rainy day fund . Rainy day fund would last 10 years without any recovery from investment pot. If crash occurs I expect travel opportunities would be restricted as well. 

Anyway I am happy with the plan to cope with downturns. Having just moved platforms (to reduce costs) I am more aware of the recent increase in the portfolio as the baseline has been reset. There is nothing in my plan to utilise the increase other than taking the 1% per quarter on the higher figure. Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

Any thoughts as we all tend to concentrate, inevitably, on ensuring our investments will last.

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Comments

  • Hoenir
    Hoenir Posts: 7,742 Forumite
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    edited 5 July at 10:27AM
    Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Than focusing entirely on the potential upside gains. 
  • AlanP_2
    AlanP_2 Posts: 3,520 Forumite
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    edited 5 July at 10:30AM
    Are you, in essence, considering having a "cash pot" that could cover n-years of income to be used if markets fall and you don't want to sell assets at a loss?

    Many people adopt that approach including us.

    Evidence however suggests that overall return is less but anecdotal evidence suggests sleeping well at night compensates for that at time of market stress.

    In terms of "year 1" of retirement, then the old maxim of if you need cash in c 5 years then have it in cash / cash like / bonds" seems to apply.

    Why take a risk you have absolutely no need to?
  • ali_bear
    ali_bear Posts: 336 Forumite
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    One way of ensuring your funds will last is to buy annuities. You can secure a level of income that equates to a moderate lifestyle then use the remaining funds for living it up while times are good. 
    A little FIRE lights the cigar
  • DT2001
    DT2001 Posts: 842 Forumite
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    AlanP_2 said:
    Are you, in essence, considering having a "cash pot" that could cover n-years of income to be used if markets fall and you don't want to sell assets at a loss?

    Many people adopt that approach including us.

    Evidence however suggests that overall return is less but anecdotal evidence suggests sleeping well at night compensates for that at time of market stress.

    In terms of "year 1" of retirement, then the old maxim of if you need cash in c 5 years then have it in cash / cash like / bonds" seems to apply.

    Why take a risk you have absolutely no need to?
    I have a cash/near cash pot and it will cover some of the market fall as I will sell less in any downturn. I see it as I will not be selling at loss but a smaller gain. 

    Whilst we have 85%+ of our investments in global equities 50% of our income is guaranteed and even if with minimal income from the investments we will have more than we are spending now after stripping out work expenses, supporting youngest through Uni and funding holidays for other children (they can afford to pay but why increase your own estate).

     I could derisk completely however it maybe psychologically feels completely at odds with how we have got to the point we are now. I see the goal as being a combination of providing ‘enough’ income and helping our children (and grandchildren if they appear!) as far as possible. 
  • DT2001
    DT2001 Posts: 842 Forumite
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    ali_bear said:
    One way of ensuring your funds will last is to buy annuities. You can secure a level of income that equates to a moderate lifestyle then use the remaining funds for living it up while times are good. 
    I think our guaranteed income of £38k from 2nd SP is enough as a base.
    If we only had SP then an annuity would be good.
  • DT2001
    DT2001 Posts: 842 Forumite
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    Hoenir said:
    Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 
    If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.
  • DRS1
    DRS1 Posts: 1,237 Forumite
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    Interesting that the OP's concern was about the investments doing well and the answers are geared to them not doing well.  I think the OP is wondering whether in good times they should draw more than 4% pa.  I suspect the answer is NO.  The good years can build a buffer for the bad years.  If anything you should consider moving away from a percentage draw and say you will draw 1% up to a cap so you are not drawing money you don't need (unless you are thinking of doing the gift out of excess income thing for IHT).
  • Hoenir
    Hoenir Posts: 7,742 Forumite
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    edited 5 July at 12:05PM
    DT2001 said:
    Hoenir said:
    Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 
    If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.
    I can only assume your personal view is based on experience purely on the recent bull market. Equities carry a risk premium due to the fact that are volatile in nature. The reality is to recover a 40% fall markets need to rise nearly 67% to recover the incurred capital loss. Hence why recoveries historically take a very long time. As more often or not there's another black swan event along the way. 
  • Linton
    Linton Posts: 18,167 Forumite
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    DT2001 said:
    We are possibly 2 years off retirement (when I say we I mean OH) however OH may continue beyond that in semi retirement depending on work offered (self employed with 5/6 sources which are unrelated to each other).

    I will have SP in 1 year. We have 3 small DBs in payment £14.5k. There is a cash/nr cash fund to cover OH’s SP equivalent until SPA in 7 years. Necessary spend £18k

    We have a written down plan to take 1% per quarter of total equity investments. This could lead to highly variable income depending on the sequence of events. The variability is not a psychological problem as we have been self employed for 30+ years and this income will be used for travel and any excess gifted. I have a rainy day fund which I thought to use if the market tanked to supplement the lower drawdown. Example pot £1.1m at start - income £44k p.a. - crash, £600k pot income £24k + £10k from rainy day fund . Rainy day fund would last 10 years without any recovery from investment pot. If crash occurs I expect travel opportunities would be restricted as well. 

    Anyway I am happy with the plan to cope with downturns. Having just moved platforms (to reduce costs) I am more aware of the recent increase in the portfolio as the baseline has been reset. There is nothing in my plan to utilise the increase other than taking the 1% per quarter on the higher figure. Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

    Any thoughts as we all tend to concentrate, inevitably, on ensuring our investments will last.

    1) I cannot see any justification for taking a fixed % from your investments each year.  If you have insufficient cash in the short term will x% be sufficient to resolve the problem? If you have excess cash why disinvest at all?

    One of the main objectives of a retirement financial strategy is surely to permit stable expenditure in the face  of possibly volatile income. Blindly taking a fixed % of assets does nothing to resolve the possible difficulties.

    It may be sensible to take money out of pensions to put into S&S ISAs if you have spare basic rate tax band but that does not involve disinvesting.
     
    2) Unless you ensure you have sufficient guaranteed income  to meet your needs you need a strategy that will allow for predictable expenditure despite highly volatile investment values. It would be sensible to start implementing that strategy perhaps 5 years before retirement, not on the day you retire, so that an early Sequence of Returns event would not destroy your plans. Presumably with your OH's variable income you already have a strategy.

    3) The strategy I use is based on putting all income (eg pensions, annuities, pension drawdown) into a near to cash pot and taking all expenditure, both ongoing and one-off, from that pot.  Over a medium term time period expenditure should be less than income and so the pot will steadily increase in value sufficiently to cover one-off expenditures and to be able to ignore crashes, barring "end of the world as we know it" scenarios. 

    It further has the advantage that one can commit to expensive one-off costs without worrying about crashes in the meantime.  Bear in mind that some expenses, say a popular cruise, may need to be booked a year in advance.

    If the pot gets too low for comfort a one off sum can be added from selling long term investments. if it gets unnecessarily high the excess can be added to one's long term investments. However such events are rare and can be managed strategically rather than in a panic.
  • QrizB
    QrizB Posts: 18,281 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    Hoenir said:
    DT2001 said:
    Hoenir said:
    Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 
    If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.
    I can only assume your personal view is based on experience purely on the recent bull market.
    You might've missed that OP will, by 2032, have £38k of combined DB and SP and an essential annual spend of £18k.
    Their £1M of equities could go to zero and stay there, and they'd still have an income similar to the average working-age household.
    I suspect they're in the same boat as certain other regulars and realise they could've retired years ago!
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